Loan Quality Lifts J.P. Morgan

Earnings rise 38% thanks to strength in the investment bank.

J.P. Morgan Chase ( JPM), the nation's third-largest bank, reported a 38% gain in first-quarter profits Wednesday, due to a sharp drop in reserves for bad commercial loans and improvement in its investment bank.

The bank, which will once again become the nation's second-largest lender after completing its acquisition of Chicago-based Bank One ( ONE), earned $1.9 billion, or 92 cents a share, compared with $1.4 billion, or 69 cents a share, a year ago. The Thomson First Call consensus estimate had J.P. Morgan earning 87 cents in the quarter.

Total revenue at the bank rose 7% to $8.98 billion, even as operating revenue from its Chase Financial Services division slid 8% to $3.4 billion because of decline in mortgage-related income. Like many banks, J.P. Morgan's mortgage lending business took a hit in the first quarter due to rising interest rates.

Shares of J.P. Morgan were recently down 75 cents, or 2%, to $37.79.

J.P. Morgan's strong quarter mainly came from its investment bank, which generated $1.1 billion in net income, a 24% gain over last year. Investment banking fees on stock and bond underwriting rose 10% to $682 million. Revenue from trading bonds and equities for the bank's own account continued to be a strong suit, raking in $1.7 billion, up 33% from a year ago.

Yet the investment bank also showed some signs of weakness. Total revenue in the division was down 1% from a year ago to $4 billion. Much of the big gains in the investment bank came from an improvement on the commercial loan and credit front, something that allowed J.P. Morgan to slash its provision for credit losses by 98% to $15 million, down from $743 million a year ago, and down 89% from the fourth quarter of 2003.

For much of the past two years, earnings at J.P. Morgan have been weighed down by bad loans and investment bets it made during the dot-com era.

Additionally, J.P. Morgan's fees from advising on corporate deals also declined in the quarter. Revenues from advisory work fell 8% to $147 million.

"In the first quarter, we delivered strong financial results and made significant progress on our merger integration with Bank One,'' said J.P. Morgan Chairman and Chief Executive William Harrison, in an earnings release.

The bank's results, in many ways, showed why J.P. Morgan is buying Bank One, which is best known for its large credit card business. Unlike other lenders, retail and consumer banking is not one of J.P. Morgan's strengths. In the quarter, its regional bank division reported a loss of $15 million, compared to earnings of $27 million a year ago.

In the quarter, the bank's numbers also were buffered by better earnings from its JP Morgan Partners venture capital group. The division generated $306 million in revenues, compared to a $221 million loss a year ago.